File it under better late than never: The White House has finally conceded that the foreclosure crisis will not ease until lenders start writing down principals. From the Obama administration’s start, consumer advocates and banking watchdogs have stressed that foreclosures will continue as long as millions of Americans remain trapped inside the hyper-inflated housing bubble Wall Street created. A new plan Treasury released today, nearly 3 million foreclosures later, suggests President Obama is starting to hear the message.
Last March, Obama rolled out his initial foreclosure relief program; it was a strikingly insufficient response to the problem. The White House steadfastly resisted forcing industry to make changes and instead offered mortgage servicers $75 billion in incentives to modify bad loans. Servicers were to rework loans such that borrowers paid less than third of their monthly income, and they were to achieve this by reducing interest rates and stretching out the life of the loan. That all failed miserably.
For one, the servicing industry proved either unable or unwilling to wade through millions of loans, one by one, and effectively walk borrowers away from the brink of foreclosure and into a modification. Fewer than 200,000 people have gotten help, which comes as no surprise to anyone following the crisis closely.
But even if servicers had been able to keep up with the growing mound of failing loans, interest-only modifications do nothing to address the fact that a quarter of all homeowners owe more money than their homes are worth. Put another way, the housing bubble may have burst long ago, but the loans that blew it up remain stuck in the market’s fantastic past. Wall Street refuses to realize its losses from this fact and Washington won’t force the point. So foreclosures continue.
Today’s announcement doesn’t alter the core problem: The administration is still not willing to force a systemic change. But the plan the Treasury Department laid out does take some important steps. It broadens the program to include people who’ve lost jobs. So servicers will get incentive payments to forbear loans of jobless borrowers for three to six months and, after that, roll them into permanent modifications where necessary. It also firms up rules to stop lenders from initiating foreclosure while borrowers are trying to enroll in the Obama program.
Most importantly, however, Treasury has begun encouraging — though not insisting — that principal reductions be part of the loan modifications. The details are a lot to digest, but the plan boils down to this: Servicers will get rewarded for reducing principles for people who are “underwater” by at least 15 percent. It’s up to them whether this applies to new modifications only or if they’ll go back and re-do existing modifications, too. In addition, underwater homeowners who aren’t behind in payments will be able to refinance through the Federal Housing Administration, backed by $14 billion in bailout funds, and bring their debt down to 97 percent of their home’s market value. Servicers will get incentives to take that loss now rather than wait for a drowning borrower to start defaulting.
This is still not a systemic solution. “It’s still a case-by-case file review,” says David Berenbaum of National Community Reinvestment Coalition, which has been among the administration’s loudest critics on banking and mortgage reform. NCRC and others want Congress to return to bankruptcy reform, which the Senate rejected last year, and allow judges to modify home loans. Saving that, NCRC argues Treasury should buy up bad loans in bulk, refinance them through FHA and sell them back to the lenders.
But the bottom line remains the same today as it was a year ago: Servicers either can’t or won’t stop the foreclosure march on their own. We’re talking about millions of loans wildly out of step with the market. That’s not an individualized problem; it’s a systemic one. It will take a system-wide solution.
Cross-posted at The Nation